China’s evolving external wealth and rising creditor position
Guonan Ma and Zhou Haiwen
China’s emergence as a major player in world trade is well known, but its rising role in globalfinance is perhaps underappreciated. China is the second largest creditor in the world today,with a net creditor position of exceeding 30% of GDP in 2007. In this paper, we test theimportance of growth differential, demographics, government debt, financial depth and theexchange rate in shaping China’s net foreign asset position. Our findings highlight the sharpfall in youth dependency as one key driver behind China’s puzzlingly large net lenderposition and also confirm the neoclassical prediction that faster growth attracts more capitalinflows. Looking ahead, our findings also suggest that China is unlikely to turn into ameaningful net debtor nation over the next two decades. Moreover, we project that, as Chinaengages in increased cross-border asset trade, its gross foreign assets and liabilities couldtriple in 10 years. While adjustments in China’s net foreign asset position are expected to begradual and may thus facilitate its capital account opening, increasing exposure to externalshocks and growing interactions with the rest of the world may present challenges both toChina and to the global financial system.JEL classification: F21, F31, F32, F36.Keywords: international investment position, external balance sheet, current accountbalance, financial integration.
Guonan Ma is a senior economist at the BIS and Zhou Haiwen is a staff member of the State Administration ofForeign Exchange of China. The views expressed in this paper are those of the authors and do notnecessarily reflect those of their affiliated organisations. We are grateful for comments and suggestions byClaudio Borio, Stephen Cecchetti, Yin-Wong Cheung, Andrew Filardo, Marion Kohler, Li Jiange, RobertMcCauley, Anella Munro, Frank Packer, Thomas Rawski, Eli Remolona and Wang Xin, though any errorsremain our own. We also thank Eric Chan and Marek Raczko for excellent research support.3